The official "blog of bonanza" for Alfidi Capital. The CEO, Anthony J. Alfidi, publishes periodic commentary on anything and everything related to finance. This blog does NOT give personal financial advice or offer any capital market services. This blog DOES tell the truth about business.

Friday, July 29, 2011

Wall Street's permanent bullishness even extends to companies that consistently lose money. YRCW's problems are so bad that analysts have to grasp at ephemeral straws to have something to write about. Note that the analyst community acknowledges the horrendous dilution and cash problems but some folks still want to reach for things like revenue that beats estimates. My readers can be forgiven for not knowing analyst tricks like lowering one's revenue estimate so that even disappointing news can beat it.

Analysts write for a living. In the face of overwhelmingly negative facts, some i-banks must think they can finagle future business out of troubled companies by playing up whatever small turnaround chance exists. I-bankers should note that YRCW has likely executed its final restructuring. The only business they can squeeze out of this company would be more asset sales (like a spinoff of its China unit, a totally unnecessary acquisition if there ever was one).

I like International Living and The Sovereign Investor for their take on world markets. It's nice to hear what aspiring expatriates think of prospects for leaving the good old U.S. Advice on cheap living aside, they should work on their fundamental analysis of stocks.

Cases in point came in this week's emailed financial teasers. Sovereign Investor swung for the fences with a broad endorsement of emerging market small cap stocks as insurance against a U.S. debt default. International Living recommends investments in Intel (INTC), Philip Morris (PM), Coca-Cola (KO) and Microsoft (MSFT) for their "above-average emerging markets exposure," whatever that means.

I usually stay away from broad-brush approaches that are "plays" on anything other than fundamental analysis. I can address these with some broad-brush critiques of my own. Small cap stocks in emerging markets are no better than penny stocks here in the U.S. They may be scams and the lack of robust securities regulation in emerging markets means you'll have a tough time doing due diligence or filing a complaint. The four stocks named above may indeed derive significant revenues from emerging markets, but a bad year here in the U.S. can negate such results. It's better to look at their whole pictures. A second act to the Great Recession is imminent, and tech stocks like INTC and MSFT will be hurt badly if businesses curtail IT spending to survive.

S.I. and I.L. are outside the box in thinking about solutions to the sovereignty crunch, Good for them. That's why I read their stuff.

These will likely prove to be isolated bright spots in an economy on the precipice of a further decline. Housing recoveries traditionally lead broader recoveries. Homebuilders are not recovering, reflecting the inability of the housing sector to lead the economy out of recession. D.R. Horton and Pulte are not doing nearly as well as they were a year ago. Their optimism for future growth is delusional.

Our leaders are playing with fire and the increasingly likely consequences of their games will be a stock market crash. If a ratings downgrade forces the U.S. to raise its effective bond yields, countries that normally have to borrow on AA or worse credit will quickly find themselves crowded out of the global bond market. That is a recipe for an immediate credit crunch in some of the markets that have been very good to U.S. multinational firms' earnings this year.

Saturday, July 23, 2011

I'm not prone to apocalyptic thinking. Life goes on for most of us no matter what unpleasant surprises come along. Here's a surprise that won't make life better for Americans. Bipartisan deficit cutting talks have broken down, and the financial markets are starting to price in the possibility of a U.S. debt default.

It didn't have to be this way. Politicians could have bit the bullet the bullet in countless ways but grandstanding for next year's elections was more important. World War I started with a similar series of strategic miscalculations. Now the global bond market will find out just how risk-free Treasuries really are. Mutual funds and state pension funds that have to sell off Treasuries in anticipation of a ratings agency downgrade will be the first dominoes in a worldwide cascade.

The long-dreaded run on the U.S. dollar is almost here. Brace yourselves.

Wednesday, July 20, 2011

Wow, how about that gold action. Gold's price strength propelled my GDX holdings past the strike price of the call options I had on them. I bought back some of that pile in a wash sale (and sold more covered calls)but I let the rest go as a capital gain. It is very difficult to tell right now whether we're headed for hyperinflation (good for gold, at least initially) or a renewed depression (probably bad for gold). My GDX holdings have done their job so far, protecting me from the mild price inflation the U.S. has experienced in 2011.

I also renewed my covered calls on FXI; none of that pile of equities was sold off at options expiration this month. China's economy is slowing down and inflation over there is heating up, but the country's central bank is in a much stronger position compared to the Fed. They're able to keep the ship afloat.

I used my growing cash pile to buy more State of California general obligation bonds and an out-of-state bank CD (short-term). This is just to get a little bit more yield. I believe my state government in Sacramento will take all necessary measures to cut its budget deficit and protect bondholder payments.

Individual equities still look too pricey given the broad market's overvaluation. No way am I re-entering TDW. Their financial statements are a huge disappointment.

This reminds me of automakers who rebrand a poorly selling domestic model for relaunch in an international market. The key there is that they can introduce the lemon to a whole new batch of suckers who've never encountered it. Doing that with financial products is almost impossible because of the globalization of financial markets. Word will get out instantly, like on this blog (thank you very much).

Ah, Barclays. You don't want someone as smart as me working there. I'd ruin some managing director's day by ridiculing stuff like this.

Foodstuffs make excellent stockpiles of hard assets for hard times. I have many shelves full of canned goods and will keep adding to my pile. I would have to take a serious look at agriculture-related stocks' fundamentals (five year ROE, etc.) to complete this part of the portfolio.

Cash-rich large cap stocks can be deceptive; it all depends on what the balance sheet is hiding. GE was cash-rich in 2008 but took TARP money to avoid a bailout. Investors would have to sift through a cash-rich company's financials to figure out just how quickly that cash would be depleted if hyperinflation pushed up raw material costs faster than the firm can raise prices.

Her concerns are well-founded, at least in mainstream elite thinking. The U.S. sovereign credit rating is currently the most stable in the world, so any uncertainty over its ability to pay its national bills will destroy the global bond market's confidence in any and all sovereign debt. The short term impact of a bond market crash would be an immediate spike in interest rates, including LIBOR. Mme. Lagarde is probably well-aware of the number of European banks that would be destroyed by an interest rate spike.

Their is no escaping contagion in global bond markets. Any sovereign default anywhere will knock over dominoes on both sides of the Atlantic. The crash is inevitable. Timing it is impossible.

The new competition is a boon to merchants, who will now have multiple channels for reaching out to customers with shopping incentives. It's ultimately bad for Groupon and all of its copycats because they'll end up copying each other's "services" to seek differentiation. That means they'll end up competing on price, because there's no way they can build brand loyalty without an emotional component in their customer service. That emotional hook is how all of those worthless Wall Street wealth management firms survive despite the universal similarity of their product lines.

Here's a prediction. The IPOs of these online coupon aggregators will tempt larger online megaportals like Yahoo and Google to buy them out at unwarranted premiums just to get a "presence" in this "space." You have to love the lingo these kids use nowadays. The whole trend will turn out the way GeoCities did for Yahoo. Remember GeoCities? I sure do, because I built my first website there in 1998. It cost me nothing, and that's ultimately what GeoCities' business model was worth. Nothing. Yahoo bought GeoCities for $3.57B in 1999 and shut it down ten years later. The same fate awaits most of these online enablers of merchant gizmos. The founders will do quite well; hence the scramble for media attention at this stage.

People desparate to make a quick buck will line up to buy hot Web stocks. Just a few headlines in investment magazines targeting the harried middle class will do the trick every time. Mutual fund managers chase the same hot trends. Nothing has changed since the dot-com era.

Friday, July 08, 2011

Frenchies are hilarious. Their banks bought billions of euros worth of worthless Greek debt and can't admit the massive losses they're about to take. Meanwhile their government is very concerned about the mostly imaginary environmental hazards of fracking in oil exploration. France's new ban on hydraulic fracturing ensures that Frenchies' energy needs will be held hostage to instability in Libya and elsewhere indefinitely. This is just too darn bad. The Paris Basin's geology resembles that of the U.S.'s oil-rich Bakken Formation and may hold very large amounts of shale oil. Frenchies are handcuffing themselves by eliminating a very successful exploration method.

The U.S. isn't that dumb (not yet anyway, although arguably we can give the rest of the world a run for its money in other categories of stupidity). The Niobrara Formation has plenty of shale oil and natural gas. Fracking is the only way to get at it. Explorers are plenty busy in Wyoming to bring this trapped energy to you and me. If I owned some shale-rich land I'd love to let wildcatters go fracking all over it in search of oil.

The note's symbol VZZ is appropriate for the fizzing sound this product made as its price declined. It also represents the sound escaping the lips of an investor who gets increasingly angry watching this product's performance. The good news is that ticker VZZ will soon be available for use. Perhaps another enterprising asset management firm with know-it-all quants will come up with a snazzy new product that will lose money.

In ABFS's case, the UPS rate increase gives them the cover they need to try to return to profitability. ABFS has had negative net income since 2009 and this rate increase may be their best shot at a positive quarter for a while. The U.S. trucking industry as a whole will soon feel the effects of a slowdown in goods orders; read my last blog post on shipping for a prelude of what's coming. LTL truckers who raise rates are trying to squeeze whatever extra dollars they can out of this economy before GDP growth slows markedly in Q3 2011. I can't say I blame them.

I can't wait for the next downturn to hit the shipping industry. It will give me the chance to buy some shipping stocks I've wanted for years. I'm willing to wait a very long time for the right entry point.

The technical feasibility of deep sea mining is not in question. Offshore industry has been able to extend drills, scoops, and other processing equipment to the sea floor since the 1970s. Even the former Glomar Explorer is still in use. Technical capability to drill an ocean floor deposit is not an indication of whether such an effort is economically feasible. One big difference between deep sea oil drilling and metal drilling is the ability of colocated natural gas deposits to force oil through a bore hole to the surface in a confined pipe. Any offshore driller looking to turn those rare earth drill sites into profitable mines will have to consider the energy costs of sucking tons of silt from the ocean floor through at least 11,000 feet of water. Scooping it up is certainly an alternative, but compare lifting a scoop through miles of water versus traversing a much smaller distance on land. Miners can build conveyor systems to carry ore out of land-based mines; building a conveyor system to go vertical from the sea bed would be a huge undertaking with a host of unknowns (like stabilizing it against ocean currents). Engineers may be up to the challenge right up until a driller's finance department figures out how much it will all cost.

Consider the environmental implications of the Japanese research project's findings. If the silt is processed on a surface ship, where will the processor dispose of the slag? Simply dumping it overboard is not a viable option, especially if it's been acid-leached (as the Japanese researchers claim to be the ideal technique). Whichever country ends up granting drilling permits will undoubtedly want to enforce its environmental laws on the seabed. The EPA will probably require slag to be brought down to the seabed with controlled action. Operators should thus plan on doubling their estimates for an energy budget.

Add it all up and filtering through deep sea silt looks like a lot more trouble and expense than prospecting for rare earths on land. It's not impossible, but it needs to be profitable.

Friday, July 01, 2011

Publicly traded companies like the attention they get from research analysts who give them formal coverage. The thing is, you have to be a solidly profitable company with a bright future to warrant coverage. Sadly, YRC Worldwide no longer meets that description, which is why research coverage of the firm is drying up. Don't worry, YRCW, I'm still tracking your every move.

Here's my theory as to how this trading anomaly may have occurred. Perhaps some hedge fund algorithm mined the market for low-priced stocks with an extremely high short interest (over 20% of float for YRCW right now). Then maybe the fund took outsized positions in YRCW options (which surged over 1200%) in the hope of driving a short squeeze that would force up the share price for some quick gains. Come on, I'm just guessing here. I don't have time to look for confirmation of large institutional long positions placed into YRCW or its options chains this week, but it's just fun to wonder which hedge fund on Wall Street is dumb enough to play this game. If Teamsters really want to be taken seriously on Wall Street, they should start their own hedge fund and try to come up with even dumber trading strategies. It's not hard at all to be dumber than the Street.

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Alfidi Capital is a private financial research firm.Alfidi Capital is not affiliated with any broker-dealer and does not manage money for clients.All information mentioned in this blog is derived from public sources.Alfidi Capital makes no representation as to the accuracy or completeness of this information.Alfidi Capital and its owner, Anthony J. Alfidi, may from time to time hold long or short positions (including options, warrants, rights, and other derivatives) in the securities mentioned in this blog.This blog is provided for informational, educational, and entertainment purposes only and does not constitute a recommendation or solicitation to execute a transaction in any investment product.Investors should consult with a properly licensed and registered investment professional before making any investment decision.The bottom line:Enjoy reading this blog, but the risk you take with investing is entirely your own.